How self-employed professionals need to prepare for IR35

Ali Palmer, Partner and Head of the Consumer & Telecommunications Practice at Odgers Interim, explains how self-employed professionals need to prepare for the changes to IR35 legislation

Woman working on a laptop featuredHeralded as the end of contracting in the UK, IR35 – the government’s anti-avoidance tax legislation – has created quite a stir amongst the UK’s 5 millionself-employed professionals.

It will mean that some (but not all) roles taken on by interims, consultants and contractors will be subject to employment tax deductions as if they were permanent employees. Right now, there is widespread misunderstanding which has led to either a complete lack of preparation amongst firms or firms making ill thought out blanket status assessments about their contractual roles.

Despite this, IR35 is far from the end of contracting as we know it. In fact, those organisations that prepare for it fairly and correctly will gain access to the cream of the crop when it comes to agile talent. This is something that goes both ways. Those self-employed professionals who have a clear understanding of the legislation and the roles that are ‘inside’ or ‘outside’ of IR35 will be in a stronger position when going to market for contractual positions. If you are a freelancer, interim manager, contractor or independent consultant, this what you need know about handling IR35:

How to determine whether a role is inside of IR35

It is, first of all, worth stating that the legal responsibility for deciding which roles are tax-deductible (inside IR35) now falls with the end-user (the client). However, given the misunderstanding about the legislation, all self-employed professionals should understand which roles are inside or outside of IR35 in the event that they need to challenge an employer.

This starts with the government’s Check Employment Status for Tax tool (CEST) which determines the status of a role based on a series of questions about that role. The tool uses three core measures to determine the status: the right of substitution, supervision and control, and mutuality of obligation.

If a role a contractor is in could be carried out by someone else with similar skills then that role falls outside of IR35 (the right of substitution). If a contractor is not being delegated tasks on a daily basis by their employer, then the role falls outside of IR35 (supervision and control). If the client provides the contractor with a mandate to complete a specific project but is not obligated to provide them with further work (and the contractor is not obligated to accept further work), then the role falls outside of IR35 (mutuality of obligation). A contractor only needs to meet one of these requirements for the role to fall outside of IR35.

For example, an IT programme manager might be overseeing the incorporation of a new product into an existing portfolio for a tech company. If she could demonstrate that the skills needed for the role could be found in another professional with similar experience that she could put forward, then the role would be outside of IR35. If, like many programmes, she was given a long-term objective to meet, but not told how to meet it, then the role would fall outside of IR35. Likewise, if the work she was carrying out meant she could operate independently on a daily basis, without being delegated to, then the role falls outside of IR35.

Who is responsible for making the tax-deductions for inside IR35 roles?

Whilst it is the end-user’s responsibility to determine the IR35 status, it is the contractor’s responsibility to pay the tax if they are inside of IR35. If the contractor has been hired via a recruitment agency, then it is the agency’s responsibility to make the contractor’s tax deductions. Some recruitment agencies are offering candidates that fall inside the legislation the option to join their payroll. By putting the contractor on an agency’s payroll for the duration of the assignment, the agency pays HMRC employer’s NI and the apprenticeship levy on behalf of the hiring organisation. This will be in addition to the standard agency fee charged to the client.

Likewise, if a contractor is operating through an umbrella company then the umbrella company is responsible for paying the relevant taxes as they are an employee of the umbrella company. An umbrella company will also manage the necessary accounting for self-employed professionals – but this comes with a fee to the contractor. The alternative option to operating under an umbrella company is to set up as a limited company. Whilst this comes with the additional accounting and business administration work, contractors who set themselves up as limited companies can pay themselves dividends and offset expenses against the business. The ability to do this is lessened if the role falls inside of the legislation.

How to be smart about inside IR35 roles

Employers need to provide a rationale for why a role does (or does not) fall inside of IR35 with demonstrable reasonable care in the decision. This should be based on the CEST tool and the core determinants of IR35. If a contractor feels as if this rationale hasn’t been provided then they are within their legal rights to challenge the determination.

There can be benefits to taking on roles that fall inside of IR35. Some organisations – particularly those in higher education – offer competitive employment packages for contractors who fall inside of IR35. This can include anything from sick pay and paid leave to cycle to work initiatives and bonus schemes; for roles that do fall inside IR35, contractors should ask if they can have access to the same benefits offered to permanent employees.

If there is one thing to take away, it would be that self-employed professionals shouldn’t buy in to the scare mongering. Everyone believed it was the end of public sector contracting when IR35 was first introduced, yet it had no detrimental impact on freelance, interim or consulting roles in the public sector. If anything, the demand for contractual skillsets from local and central government has surged in the last three years – the private sector will follow the same trajectory.

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